Rising interest rates…escalating mortgage stress … an increasing number of defaults and repossession…these are all part of Australia’s present economic climate.
Hardship applications under the Uniform Consumer Credit Code (UCCC) are available to debtors to prevent repossession of property. In its Bulletin No 46, the Banking and Financial Services Ombudsman stated:
"The new Code of Banking Practice introduced an obligation to try to help individual and small business customers overcome their financial difficulties and provide information about the UCCC hardship variation processes if they could apply to the customer’s circumstances. These are positive, contractual obligations and our view is that we can consider disputes that a bank has not done what it promises to do under"…the Code.
Once an application is made, no legal action can be brought against debtors until it is settled and this often precludes any subsequent legal action by creditors against debtors. Certain conditions apply to the granting of an application under the UCCC:
- Borrowers have a right to make a hardship application to the Credit Tribunal where credit is less than $304,440- section 66(3). This figure changes from 12 May 2008 to comply with the floating threshold which varies periodically to reflect the cost of new houses in the Australian property market.
- Debtors must prove their requirements for hardship- section 66(1):
- the debtor must be unable to fulfil the obligations under the credit contract because of illness, unemployment or other reasonable cause;
- the debtor must reasonably expect that if the obligations are varied they will be able to discharge them.
- The debtor must specify the particular variation sought to the credit contract. Three types of variation are permitted- section 66(2):
- extending the term of the credit contract and reducing the amount of each payment;
- postponing for a specific period payment under the credit contract without extending the overall term;
- postponing the due date of payment under the contract and extending its overall term.
- Where a credit provider and debtor agree to vary the contract over 90 days the credit provider must give written notice of the variation. This must be given to the debtor and guarantor within 30 days of the agreement. There is a fine if a credit provider fails to comply with the requirements of giving notice- section 67.
- Variation of the credit contract can be made by agreement or failing this by a court order upon debtor’s application if the debtor and credit provider are unable to agree on a hardship variation- section 68(1). After hearing the submissions of the parties the court may dismiss the application or vary the credit contract- section 68(2).
- The court may order that no further legal action be brought against the debtor while the court is determining the hardship application- section 68(3).
In a decision of Allco Principal Finance Nominees Pty Ltd v Stojanovic (Credit) [2007] VCAT 1245 (17 July 2007) of the Victorian Civil and Administrative Tribunal (VCAT), a hardship application under section 68 of the Credit Code was granted to Mr Stojanovic whose financial situation deteriorated and he could not make repayments towards his $25,007.50 loan. The credit provider Allco applied to VCAT to take possession of his Holden Statesman when at the time of his default the balance was $21,528.00. VCAT dismissed Allco’s application for repossession, granted the hardship application and reduced Mr Stojanovic’s repayments from $261.28 to $200.00 a fortnight.
In another VCAT decision of Harding v National Australia Bank Ltd (Credit) [2007] VCAT 1234 (9 July 2007) applicants Ms Harding and Mr Lorimer made a financial hardship application under section 68 of the Consumer Credit Code to repay their $222,500.00 variable interest rate loan at a fixed rate of $700.00 instead of $651.31 a fortnight. The Tribunal accepted the hardship application and ordered the applicants to file an amended application for the reduction of repayments and the period they sought the repayments to be reduced. It was further ordered that the applicants attended mediation with the bank.
Lenders need to be aware that the Code of Banking Practice imposes positive obligations to try to help individuals and small business customers to deal with financial difficulties and provide information about the Code and hardship. Debtors who fall into financial difficulty may consider filing financial hardship applications. This could allow for a refinancing of their credit contracts and make repayments manageable to avoid the repossession of property by financial institutions.
Should you require advice on compliance training on the operation of hardship provisions in the Uniform Consumer Credit Code, please contact Mr Gino Potenza on +61 3 9608 2270 or g.potenza@cornwalls.com.au or
Elpis Korosidis on + 61 3 9608 2115 or e.korosidis@cornwalls.com.au
